Here’s one of the more interesting questions today: What will Eldorado Resorts look like after it acquires Caesars Entertainment next year? And what ramifications will flow from the transaction?
To date, much of the speculation has been on which Las Vegas Strip property or properties Eldorado will sell, to whom, and what the valuations will be.
The recent sale of Circus Circus by MGM Resorts to Phil Ruffin and the sale and leaseback of Bellagio to Blackstone at more than 13 times EBITDA has excited investors about the value of Strip properties and also about the role REITs will play in facilitating sales that unlock value.
The next big step in that process will be MGM’s sale and leaseback of the Strip’s largest property, MGM Grand, which will involve at least one REIT, MGM’s majority-owned MGM Growth Properties.
Then it will be Eldorado’s turn.
But sales aside, Eldorado will be a dramatically changed company and worth a look on its own.
Roth Capital analyst Dave Bain has taken that look, and come up with this:
Eldorado will grow between this year and 2021, its first full year of Caesars ownership, from $2.538 billion in revenues to $11.677 billion, and from $726.6 million in EBITDA to $3.962 billion.
He values Eldorado at $75 a share. That’s just 7.4 times 2021 EBITDA and 5.1 times EBITDAR.
More interesting, Bain sees a price of $91 assuming certain events, such as the sale of a Strip property, which he thinks would be worth $3 a share. Bain assumes a price of 12 times for a $140 million EBITDA-generating property. A mid-Strip property could fetch a higher valuation, Bain notes.
Here are some other catalysts he sees for a rise in price:
- investors responding as states approve the Caesars acquisition
- Favorable debt refinancing
- Sale of non-core assets such as Caesars Promenade
- Value of Eldorado’s non-gaming real estate development in Pompano, Florida, with partner Cordish Cos.
In the most interesting observation, Bain thinks Eldorado might spin off its sports betting operations next year in a deal worth $3 a share, while it retains 50 percent ownership.
This possibility is intriguing, as investors have been asking how to play the expansion of sports betting in the U.S. Is it buying shares in some of the sports operators, software and media companies, many from the UK and Sweden? Is it buying shares of casino operators that are offering sports betting services to other companies, such as MGM and Churchill Downs? Is it buying a basket of the micro caps crowding the space? Is it buying the games-lottery providers with robust sports betting technology, IGT and Scientific Games?
Eldorado could offer another way.
Eldorado has an agreement for its sports betting operations to be run by London-listed William Hill. In exchange, Eldorado owns 20 percent of subsidiary William Hill US.
The acquisition of Caesars is a very big opportunity for William Hill US. All of a sudden, it would have sportsbooks in the largest collection of casinos in the United States, as well as its burgeoning operations in other states. So far, 19 states have legalized sports betting, and more are following. William Hill should be a player in most, if not all, of them.
To date, there has been no way for investors to play William Hill’s great U.S. potential, because they have to buy the stock of the parent company, which has bigger issues such as tighter gaming regulations in its home market of the United Kingdom.
However, a properly structured Eldorado spin-off of its sports betting operations, one that involves William Hill US, could do the trick.
